Media Firms Probed on Data Release

Investigators Examined if Economic Figures Were Given Early to Clients; No Criminal Charges Seen

By

Brody Mullins And

Devlin Barrett

Updated Jan. 28, 2013 10:24 p.m. ET

WASHINGTON—Law-enforcement authorities have conducted a wide-ranging investigation into whether media companies facilitated insider trading on Wall Street by prematurely releasing market-moving government data, according to people familiar with the probe.

The federal investigation examined whether news organizations used high-speed transmission systems to give some investors access to economic data a fraction of a second before the official release time, according to officials familiar with the probe.

Among the media companies investigated were Bloomberg LP, Thomson Reuters Corp. and the Dow Jones & Co. unit of News Corp., which are the leading conduits of federal economic data to traders right after release, though not the sole ones.

Investigators recently decided not to file any criminal charges, said people familiar with the matter. Investigators had launched the probe after spotting trading patterns suggesting some traders received data slightly before the release time; the investigators decided against filing charges because they couldn't link the pattern to specific actions by media companies, people familiar with the probe said.

ENLARGE

The probe was technically and legally complex, examining whether a decades-old tradition of releasing data such as job totals and economic growth through a select group of media companies could be manipulated via new technology.
European Pressphoto Agency

A key issue, one of the people said, was whether the government could prove in court that a time advantage for a trader of a sliver of a second—as little as a few thousandths—was enough to conduct profitable trades on confidential information.

Even so, these people added, investigators continue to have general concerns about the handling of federal economic data. Federal Bureau of Investigation agents focused much of their attention on activities at the Commerce, Labor, and Treasury departments, said people familiar with the probe. "There is a vulnerability there, but agents just can't prove that it was being used illegally," said a person familiar with the investigation. The FBI plans to brief agencies about its findings.

The FBI and the Securities and Exchange Commission examined operations at all major government departments that release economic data, including the Federal Reserve and the departments of Energy and Agriculture, according to people familiar with the investigation.

Among media firms, the people said, Bloomberg came under particular scrutiny. As part of the probe, investigators last summer asked for Bloomberg to turn over one of their computers at the Commerce Department, according to people familiar with the probe. Bloomberg complied, and federal agents took possession of the computer.

That happened, the people said, after Bloomberg tested its computer system at an embargo procedure known as a "lockup" and found a flaw that could allow reporters to deliver data before the end of the embargo period. "We discovered a flaw in the Department of Commerce's lockup system during a testing period sponsored by the department," said a Bloomberg spokesman. "We alerted Commerce to this flaw when we saw it had potential to be exploited by others to beat their embargo during an actual lockup. We suggested solutions to secure their system and they thanked us for alerting them to the issue."

A Thomson Reuters spokeswoman said the firm wasn't aware of any criminal investigation and hadn't turned over any of their equipment to authorities.

At Dow Jones—which competes with both Bloomberg and Thomson Reuters and which publishes The Wall Street Journal—a spokeswoman said that "over the course of handling thousands of embargoes during the past several years, Dow Jones is not aware of violating an embargo on any major piece of economic data." The spokeswoman said that the company "would never sanction any intentional violation" and that it hadn't been contacted by investigators about any criminal investigation.

Federal investigators also sought to determine whether certain smaller media outlets with access to the data may have functioned as extensions of trading firms.

Investigators also looked into whether any specific employees or contractors, rather than the media firms as a whole, broke the rules.

The probe was technically and legally complex, examining whether a decades-old tradition of releasing data such as job totals and economic growth through a select group of media companies could be manipulated via new technology. Adding to the complications, media firms whose businesses rely on speedy transmission of data have long asserted First Amendment rights to work relatively unimpeded by government officials and rules.

At issue is the rise of computerized trading. In recent years, sophisticated investors have created complex trading programs that automatically execute trades once fed market-moving data. Media firms, meantime, have earned new revenue by zapping the data from the government directly into clients' trading computers. The probe comes as the government investigators who focus on potential market abuses have been widening their horizons because of the computerization of markets.

To maintain a level playing field for investors, government agencies have created protocols for releasing economic reports. The Labor Department, for instance, uses a lockup system in which reporters with media credentials gather before 8 a.m. and receive data on the promise they won't publish before the embargo lifts at 8:30 a.m. Such a system was designed years ago to give reporters time to craft their articles. It grew partly out of a 1905 scandal in which traders obtained confidential cotton-crop estimates.

At lockups, news organizations have been required to plug their computers into a device called a "black box" tied to a central switch, which blocks computer transmissions until the embargo lifts. To make sure it lifts at precisely 8:30 a.m., the Labor Department has an atomic wall clock timed to the Naval Observatory Master Clock. The ritual is repeated roughly 10 times a month at the department.

While most reporters at the lockups just write articles, data providers also focus on getting the numbers to clients instantaneously. Dow Jones, for example, sends two reporters. One writes an article based on the still-confidential data, to be released when the embargo ends. The other writes headlines in software that, when the embargo lifts, will channel the raw figures on a separate feed straight into trading systems created by investors.

Carl Fillichio, a Labor Department spokesman, told a House hearing last June that media firms compete to make "the raw data available to subscribers trading on it through algorithms, which is not the purpose of the lockups."

SEC and FBI investigators have harbored suspicions since 2007 that some traders may have gained access to information slightly before it was public, according to people familiar with the probe and an audit of Labor Department systems. Exactly how that might have happened is unclear. Mr. Fillichio said in written testimony that reporters contact the department "frequently to voice concerns that competitors may have gained unfair advantage in speed of transmission or have surreptitiously broken embargoes."

Rob Doherty, general manager of Reuters in the U.S., said at the hearing that in late 2008, Reuters twice sent employment and productivity data to clients slightly before embargoes ended, which he described as mistakes resulting from a computer reconfiguration.

Prompted in part by concerns raised by the SEC and FBI, the Labor Department hired Sandia National Laboratories to audit its data-release system. The 2011 audit findings, dubbed "CleanSweep Red Team Report," said among other things that contractors for media companies have access to areas housing the department's communications systems, which it said creates "opportunities for adversaries to compromise critical DOL communications and data infrastructure."

The audit also said "concern exists over which 'press' organizations are allowed access to informational release events." The Labor Department last April limited credentials to "primarily journalistic" enterprises, essentially barring several entities from lockups. One blocked was Need to Know News, owned by German stock exchange Deutsche Börse. The exchange declined to comment.

The department also announced new lockup policies, including prohibiting reporters from using their own computers, pens and other equipment. That drew a protest.

Requiring reporters to use Labor Department computers "moves an independent press into a position uncomfortably close to that of a government deputized captive distributor," said Daniel Moss, a Bloomberg News executive editor, in testimony submitted for the June House hearing. Reuters and Dow Jones also objected to the changes. The department and the media firms reached a compromise that let the firms continue using their own computers and data lines to ensure fast delivery of economic news but let the Labor Department control access to the computers and supervise maintenance of the equipment. The department also rebuilt its lockup room with walls that block wireless signals.

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